Democrats block GOP effort to kill consumer protections

The Senate on Thursday rejected a Republican attempt to defang consumer protections in a sweeping Wall Street reform bill, while voting to give small banks a break on deposit insurance.

Despite procedural delays, lawmakers covered some ground on a top priority of the Obama administration that would be the biggest overhaul of the financial rulebook since the 1930s.

A proposal to challenge the Federal Reserve‘s secrecy about its role in the 2008 financial meltdown gained support in the Senate, but a vote on it was put off until next week.

As lawmakers debated, a stock market stampede wiped out nearly $1 trillion in equity value before prices recovered. The Dow Jones Industrial Average suffered its worst intraday point drop ever.

The plunge could not have come at a worse time for Wall Street, which is already suffering from a wave of public anger following the meltdown and subsequent bailouts of 2008-2009.

Final approval of the 1,600-page reform bill was expected in two to four weeks, but thorny disputes loomed. With more than 140 amendments circulating, Democrat leaders were struggling to stave off gridlock on the Senate floor.

If approved, the Wall Street reform bill would give Democrats a major legislative victory ahead of November’s elections. Republicans have worked for months to weaken and delay the measures, along with financial industry lobbyists.

Congress is undertaking a major rewrite of the rules to try to make banks and capital markets less prone to periodic crises that have become more common since a wave of deregulation in the 1980s. The future profitability, risk capacity and growth potential of financial firms hang in the balance.

The stakes are high for President Barack Obama, a forceful advocate of reform. He laid the groundwork for legislation in mid-2009 with a package of proposals. The House of Representatives has approved a bill embracing many of them.

Whatever comes out of the Senate must be merged with the House bill. Analysts say that could happen by the end of June.

The Senate voted on Wednesday to create a new protocol for dismantling distressed financial firms and to bar use of taxpayer funds to bail out financial institutions.

No votes on amendments will be held on Friday or Monday, said Democratic Senator Christopher Dodd, the bill’s author.

On Thursday, lawmakers debated a measure that would open the Fed to a broad congressional audit of its emergency lending during the meltdown and force it to disclose information publicly about who it assisted. But a vote on the measure, drafted by independent Senator Bernie Sanders, was delayed.

After taking unprecedented actions to stabilize the economy during the crisis, the Fed has worked fiercely to protect its tradition of secrecy, warning of the potential for political interference in its core monetary policy mission.

Sanders’ amendment, which does not target monetary policy issues, initially got support from an unusual coalition of both liberal and conservative senators.

After he modified it to ensure that the Fed would only have to submit to a one-time audit, Obama administration officials dropped their objections and Dodd said he would back it.

The Senate rejected a proposal that would have split up the six largest banks in an effort to ensure that large financial firms do not threaten the economy if they fail.

The measure would have limited banks’ share of insured deposits and the size of their non-deposit liabilities.

Earlier in the day, lawmakers approved an amendment that would force major banks — such as Bank of America, Citigroup and Goldman Sachs — to pay more for government deposit insurance and let smaller banks pay less.

The measure, approved by a vote of 98-0, reflected the increased clout of small banks on Capitol Hill since the financial crisis, which has deeply damaged the political standing of big banks and Wall Street.

In a win for Obama, Democrats turned back a Republican proposal that would have weakened consumer protections proposed in the wider reform legislation by a vote of 38 to 61.

The bill calls for setting up a consumer protection watchdog bureau in the Federal Reserve that would regulate mortgages, credit cards, payday loans and other products.

The spread of subprime mortgages in the real estate bubble ahead of the crisis showed that consumers need better protection from aggressive lenders, Democrats say.

But Republicans say the Fed unit would be too powerful and impose excessive compliance costs and red tape on small businesses including orthodontists and florists.

Major financial firms’ credit card and mortgage profits would also be threatened by a consumer protection watchdog.

The Republicans’ defeated amendment would have put the watchdog in the FDIC, not the Fed, with less independence.

The Senate adopted a measure to give commodities regulators more clout in prosecuting price manipulation.